Fixing economic inequality from the bottom up

Commentary: Higher minimum wage, universal pre-K are new approach

After years of trying to tackle economic inequality by redistributing from the top down, President Barack Obama has pivoted to a bottom-up approach.

WASHINGTON (MarketWatch) — After years of trying to tackle economic inequality from the top down, President Barack Obama has pivoted to a bottom-up approach.

Instead of bashing billionaires and knocking them down a peg, Obama is now focusing more on lifting the poor up. Several of the proposals in his State of the Union address are designed to lessen inequality by improving the lot of those at the bottom, not by redistributing from those at the top.

As he said in Tuesday’s State of the Union, “It is our unfinished task to restore the basic bargain that built this country — the idea that if you work hard and meet your responsibilities, you can get ahead, no matter where you come from, no matter what you look like, or who you love.” Read the full text of Obama’s State of the Union.

Long before housing bubble burst, long before Lehman Brothers crashed the financial system, long before 9 million workers lost their jobs, the middle class and the working poor were falling behind. Their wages were barely keeping pace with the rising costs of housing, education, health care and gasoline.

At the same time, the truly wealthy, the top 1% or 2%, were grabbing ever-larger shares of the national income pie. Since the mid-1970s, the top 10% increased its share of national income from about a third to nearly half, according to Emmanuel Saez, the top researcher in inequality. Read Saez’s latest research.

The top 1% has doubled its share, from about 10% in the 1970s to 20% today.

With income inequality at the highest rates in nearly 100 years, we’re in a new Gilded Age.

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Since 1993, the top 1% have captured nearly two-thirds of the entire nation’s increased income. Between 2009 and 2011, they got all of the increased income and then some, Saez estimates. That means, on average, the rest of us, the 99%, lost income during the first two years of the recovery.

The government certainly didn’t create this problem single-handedly but it has contributed.

Technological changes may be the primary factor, but regressive tax policies, the erosion of unions, and changing cultural norms also played a role in rising inequality. Increased global competition has reduced wages for low- and middle-income Americans while protecting elites.

The latest budget deal has made the tax code marginally more progressive, with higher tax rates at the top. The top 1% percent would also be targeted in any additional tax increases, even if done in the guise of “tax reform.” But that’s unlikely; Obama seems to have given up, for now, getting any more revenue from the top.

Instead, he’s putting his efforts into increasing incomes and opportunities at the bottom.

Consider two proposals in his State of the Union: Raising the minimum wage and improving educational outcomes for poor kids.

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Minimum wage: Obama has proposed increasing the federal minimum wage from $7.25 to $9 by 2015, and index it to inflation thereafter. About 15 million workers would see a raise in their hourly pay, according to the White House.

In the 1950s and 1960s, you could live on the minimum wage, but it hasn’t kept up with the cost of living.

In the late 1960s, when the minimum wage was equivalent to about $9.42 an hour now, paying rent on a typical apartment took less than two weeks’ wages. But now, it takes nearly three weeks of full-time work to pay the monthly rent on the average apartment.

Back in 1960s, the minimum wage was set at about half of average hourly earnings, ensuring that the working poor wouldn’t fall too far behind. Now, the minimum wage is only about 36% of the average hourly wage of $20.

Some people say economic theory suggests that raising the minimum wage would destroy jobs, because some people who are currently employed at $7.25 aren’t productive enough to hire at $9.

But empirical research, some of it conducted by chief White House economist Alan Krueger, suggests that the theory doesn’t hold up in practice.

Some people might be unemployable at a wage of $9 an hour. For some of them, the solution might be to improve their skills.

Improving education: Obama has pushed for lifelong education and for increased access to post-secondary education.

And, in the State of the Union, Obama proposed making pre-kindergarten available to every child in America. While this might not do much for the middle-class kids who already have a nurturing home environment, it would have a big impact on poorer kids who don’t have the same resources.

The best research on this topic shows that enriching the environment of 4-year-olds is one of the best investments we can make in the future. Adults who have a rich nurturing environment before the age of 6 are more likely to graduate from high school and from college, have higher incomes, and are less likely to be incarcerated.

Early childhood education not only improves kids’ cognitive skills (such as reading, writing and arithmetic), but also improves their non-cognitive skills (such as cooperation, attentiveness, self-confidence, perseverance and motivation). Both types of skills are necessary for success in life.

Obama’s proposal would be expensive, but it would pay off if implemented in the right way.

Based on long-running studies of adults who were in early education classes in the 1960s and 1970s, Nobel Prize- winning economist James Heckman of the University of Chicago figures the return on investment is between 7% and 10% per year, better than stocks. Read Heckman’s essay on Promoting Social Mobility.

Early childhood education could help break the vicious cycle of poverty, saving us billions over the lifetime of a generation.

Obama’s strategy in his second term may turn out to the better one. The billionaire bashing made for a good sound bite, but helping people on the lower rungs of society might make some real change and create a lasting legacy.

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